Peter Hall2015-03-03T14:12:59-05:00Peter Hallhttp://www.huffingtonpost.ca/author/index.php?author=peter-hallCopyright 2008, HuffingtonPost.com, Inc.HuffingtonPost Blogger Feed for Peter HallGood old fashioned elbow grease.These Canadian Industries Are Winning the Trade Gametag:www.huffingtonpost.com,2015:/theblog//3.67207962015-02-20T12:59:55-05:002015-02-20T13:00:13-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
Progress on trade diversification over the past 15 years is likely one of the most remarkable developments in Canadian economic history. A strong dependence on traditional markets was only enhanced by the Canada-US FTA, which saw exports to the US soar to over 85 per cent of the total. But a big shift began in the New Millennium. Beset by a thickening Canada-US border, the tech wreck and a rapidly-appreciating loonie, Canadian exporters looked to fast-growing emerging markets for growth. They hit a goldmine. While US exports barely budged, exports to emerging markets soared by an average annual pace of more than 10 per cent, raising their share of total exports from 5 per cent to over 12 per cent -- a trend that is still on the rise. If the same patterns continue, emerging markets could account for almost one-third of total Canadian merchandise exports.

How are we doing industry-by-industry? The results are telling. Canada's top three merchandise export industries are, in fact, highly concentrated. Close to 100 per cent of oil and gas exports, which in 2014 accounted for almost one-quarter of total goods exported, go to the US market. Add in refined product exports, also highly concentrated, and you get another 5 per cent of exports. Plunging oil prices are currently wreaking havoc with that sector of Canada's economy. Vehicle assembly, our number two export at 10 per cent of the total, exports almost exclusively to the United States. In each case, shifts either in industry or broad macroeconomic conditions have swept up well-managed, highly innovative and profitable exporters in a malaise not of their own making. As a small, open economy, is this just our fate, or are there other industries that are faring better?

Good news -- most other industries are not as exposed as the top three. Manufacturers tend to be less diversified than key non-energy primary industries, but most have made substantial progress in the past fifteen years. Take the aerospace sector, which has increased emerging market sales from 4.5 per cent to 23 per cent of its total export book. From just 4 per cent of exports, emerging market sales of turbines and power transmission equipment has risen to 16 per cent. How about commercial and service industry machinery, from 5 per cent to 27 per cent? Or processed seafood, tripling from 8 to 24 per cent? And there's also processed meats, from a respectable 11 per cent to 30 per cent. The list goes on - aside from the top three, there's barely a manufacturing sector that has not seen a significant increase in its emerging market exposure.

Primary industries have even more dramatic results. Pulp mills ship 51 per cent of their exports to developing markets, up from just 5 per cent in 2000. Coal has seen a similar surge, while the base metals sector has zoomed up from 19 to 38 per cent exposure. Precious metals came out of oblivion in 2000 to ship 17 per cent of their exports to emerging market buyers. The agri-food sector, already highly diversified, has generally added to its emerging market presence. One can only imagine what overall diversification numbers would look like if Canada's top exporters were also diversifying at the same pace.

Some believe that the trend is over, or that it's just single markets that are accounting for more recent movements. That's largely because the U.S. is in revival mode, and emerging markets are still harnessing this new growth. But as the U.S. dollar strengthens, transmitting its growth abroad, emerging market revival will again provide the best export growth setting.

The bottom line? Most industries have participated in the broad diversification trend. Revived global growth will again pay handsome dividends to exporters who are not just involved in the market next door, but in the world's fast-paced 'next' economies.

Also on HuffPost:]]>What the Sheer Volume of Japan's Debt Really Meanstag:www.huffingtonpost.com,2015:/theblog//3.66738182015-02-13T17:40:13-05:002015-02-13T17:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
Europe's fiscal fiascos were highlighted by the 2008 economic and financial crisis. Maastricht rules were for the most part reining in even the region's worst fiscal sinners. But Japan's story began much earlier. Back in 1990, on the strength of a long post-war growth cycle, Japan's fiscal picture was exemplary. Its debt-to-GDP ratio was 69 per cent, close enough to Europe's guidelines for sustainability, and net government debt was about as close to zero as possible. Others worried about Japan's ascendancy, and its rising global financial clout. The late 1980s saw Japan gobbling up prime assets across the planet, with no apparent end. It seemed Japan could do no wrong.

Recession jolted the good times. Japanese property -- seen by most as a no-lose investment strategy -- suddenly faced plunging prices. Lower demand shocked the globally-efficient multi-nationals and revealed a far-less-efficient layer of smaller businesses in the domestic and export supply space. This mix of events sent the financial sector reeling into a series of largely unsuccessful stop-gap measures. Meanwhile, the economy had to absorb the effects of an ageing population, a phenomenon that few developed economies had yet encountered.

As a result, Japan ventured into the ultra-low interest rate world, and is still there. A second response was wave after wave of fiscal stimulus. A quarter century on, this strategy has taken Japan from a model of fiscal management to a global Achilles' heel. The national debt-to-GDP ratio has ballooned to 245 per cent, and rising. By contrast, Greece's debt, at 175 per cent, is now in retreat, thanks to strict austerity measures.

Japan's net financial liabilities used to take it off the hook. However, they too have soared, and now stand well above Greece's, at 140 per cent, and rising. Many will argue that although these ratios seem impossibly high, the debt is mostly domestically owned, and thus not vulnerable to jittery foreign financial markets, currency fluctuations and the like. Analysts will also point to Japan's foreign net creditor position as an important source of capital. These arguments are credible, but debt levels this high still have significant effects.

First, the sheer volume of the debt consumes a disproportionate amount of available savings. Put another way, the need to service public debts is crowding out funds that might otherwise be used for private investments. It also calls into question future availability of funds. Eventually, according to IMF estimates, Japan's debt will rise to the level of total available savings -- suggesting a needed new foray into international markets.

Second, the debt mountain creates a huge vulnerability to the prospect of higher future interest rates. Low borrowing costs have long been the norm, but recently the spread on Japan's 10-year bonds against 10-year bunds has closed -- and it's not because bunds are falling. Something is happening at the long end of the market that could be suggesting a rising risk premium.

The scenario is precarious. Anything that interrupts current rhythm could distract the tightrope-walker, with serious consequences. So far, Japan has been able to skillfully manage its predicament, but it appears to be running out of time.

The bottom line? Revived global growth may be just in time to avert a high-wire accident. Growth helps -- but is no substitute for the structural changes that have turned things around in Southern Europe. This is one we'll be keeping our eyes on.

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]]>What Oil Prices Are Doing to Mexico's Economytag:www.huffingtonpost.com,2015:/theblog//3.66237982015-02-05T17:49:09-05:002015-02-05T17:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
Even if Mexico was doing well, recent data have many fearing a turn for the worse. Plunging oil prices have hit just as Mexico is implementing its greatest round of structural reforms -- notably in the energy sector -- threatening to undermine the process. And with one third of the federal public purse dependent on the oil sector, the halving of the Mexican oil basket-price suggests tough times for policy development and implementation and the risk outlook for the country as a whole. So, does Mexico have its own particular version of a dimming global outlook?

Maybe, at first blush. But scratch a bit beneath the surface and things don't look quite as bad. Burned by the volatility of oil markets in the past, the federal finance ministry has engaged in a hedging program that will, for the most part, ensure that oil price targets in its fiscal budget are met. Add to that significant government reserves and IMF funds that can be accessed if needed and things don't look nearly as bad -- at least for 2015. After that, the hedge runs out, and Mexico is at the mercy of the market. But this year allows for time to adjust plans and by year-end, oil prices may well be up from their lows, limiting the damage to the bottom line.

Even if the economy suffers at the hand of oil, there is a lot else going on. As the other economy that shares a border with the world's growth engine, Mexico has had a banner year in trade. Thus far, exports are up 7.9 per cent this year, thanks largely to the US economy, and given the latter's continued strength, Mexico's exporters seem buckled in for another great year. At the same time, lower oil prices have weakened the peso, which is down roughly 10 per cent against the US dollar recently and should give an additional boost to manufacturer-exporters.

Export growth should also benefit from Mexico's success at attracting significant manufacturing sector investments by foreign multinationals. The auto sector continues to pour funds in, not just from this continent but from Western Europe and Asia. While recent record-setting activity is not expected to persist, it is a testament to this country that in an investment-constrained world, it has been able to boast substantial inflows.

Those inflows are likely to get even better in the short term. With the US industrial machine facing ultra-tight capacity constraints this year, and an order book that continues to swell, Mexico stands to attract investment by US firms desperate to increase capacity speedily. As the growth cycle persists, other nations may also be at the doorstep. Labour constraints are expected to be a key feature of the current growth cycle, not just the familiar OECD cases, but also in key emerging markets like China. Sustaining productive capacity is likely to usher in a wave of cross-border investing in search of labour -- and Mexico has a deep endowment of both skilled and unskilled labour.

And don't forget the reforms. Sure, oil prices have added doubt to current progress, but some of the energy plays in Mexico remain long-term plums that oil and utility majors will find hard to resist. Investment funds are also likely to show interest, and their sights are almost always set on longer-term plays. Notice as well that it's emerging markets with reform programs like those in Mexico and Colombia that are currently over-performing.

Is the news all good? Not exactly. Recent high-profile crime and violence has sullied the Pena Nieto government's reputation, and in addition to other blow-back, may slow the reform process and the economy's ability to attract key investments. Also, a permanent drop in oil prices would necessitate a biting re-tooling of the country's finances, dampening the outlook.

The bottom line? Mexico is off to a good start in the nascent growth cycle, with a substantial boost coming from the resurgent US economy. If it remains stable, it will continue to be a good source of global -- and Canadian -- industrial capacity.

MORE ON HUFFPOST:]]>Why the Hysteria Over Oil Prices Is Overblowntag:www.huffingtonpost.com,2015:/theblog//3.65254262015-01-22T17:17:17-05:002015-01-22T17:59:02-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
It can seem like an eternity, and can obliterate any pre-storm memory. This sounds eerily similar to the oil price tempest we are in the middle of right now. Today's price seems like the only reality, except that the plunge is still on. Are we going to survive this thing? Can we ever expect a return to calm?

Dial in to the news, and you'd be tempted to think not. It's natural that storms bring about their own brand of myopia, but that's when experience should make us wiser. And we all have a lot of that to draw on. We only have to rewind back to 2008 to see a very similar situation to today's. Back then, oil prices slid from well over $100 per barrel at the peak to $40 at the trough, all in about five months. Currently, prices are tumbling from just over $100 to just over $40 over a six-month span. Just eyeballing the raw data, the similarity is staggering. So are other key features.

Both episodes were preceded by positive predictions. Back in 2008, fears that we were running out of oil led to very believable predictions of imminent $200 per barrel crude. Supply constraints in the 1970s led to very similar longer-term predictions. In today's case, predictions weren't as wild, but in general forecasters preferred to believe that a return to global growth would keep prices in the triple-digit zone. Funny how diametrically wrong pundits can be, even with a wealth of instructive recent experience.

Both episodes also produced pessimistic predictions. Ah, the clarity of the ex-post pundit: the 20-20 vision of events repeatedly re-creates the illusion of equally crystal forward vision. Credible forecasters now see $40 oil persisting -- just like they did in 2008, only to watch prices zoom up to $75. Or like the famous call a decade sooner than the last crash -- momentary $10 oil led to a famous and widely-quoted declaration that structural factors were driving prices to $5 per barrel. Over-reactive predictions are probably the most predictable part of large swings in indicators.

Another feature is the "permanent" cancellation of projects. They are gobbling up press lineage as we speak, inciting fears of recession and fiscal red ink. Same thing following 2008. And without a doubt, they have immediate and damaging implications for the economy. But are they permanent? Not unless the plunge actually persists. Subsequent price revival -- even if only partial -- usually gets deal-makers back around the table. The carnage is rarely as bad as feared in mid-storm.

So much for similarities. Are there contrasts? A key difference between 2008 and now is that back then, the biggest recession since the Great Depression was underway. Currently there are worries about weakness, but the US economy is growing gangbusters. Also, back then the economy was highly dependent on policy measures. This time, growth is more than self-generating. One more point: back then supplies were very tight, then not. Now, we believe we are swimming in extra supply, and we seem to have forgotten that today's surpluses could easily be soaked up by resurgent emerging market growth.

What does history tell us? There are moments where sharp movements persisted. The price hikes of the 1970s were with us a long time. The mid-1980s plunge, credited with ending Communism, was around until early in the New Millennium. But those movements were driven by specific structural factors.

Today's plunge, influenced by recent supply, demand and financial liquidity developments, is likely overdone; high-frequency hysteresis-hysteria for the moment seems to be ruling the day. And perhaps the most important, yet oft-forgotten instructive adage on current market mayhem is that in the majority of cases, wild price movements set up the conditions that architect their own undoing.

The bottom line? It's hard to get a grip on reality in the middle of a storm. History tells us plainly that better weather is on the way. But in the clutches of its momentary eternity, the storm convinces us that nothing else matters. Oil's recent rout is likely little different. If so, this too could be a fast-forgotten moment.]]>Is the Mega Trend of Fiscal, Structural and Institutional Reform Losing Momentum?tag:www.huffingtonpost.com,2015:/theblog//3.64798422015-01-15T17:00:49-05:002015-01-15T17:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
Developments of the last few years have raised expectations on fiscal, structural and institutional reforms in countries the world over. Everything from social security to industrial concessions have reentered the public discourse, with vigour. But as growth pauses in markets from India to Brazil, many are questioning policymakers' ability and willingness to push through some of these changes. Are we witnessing another ebb, or does the current wave of reforms still have sufficient momentum to wash ashore new opportunities for Canadian business?

At first glance, recent events are not promising. Brazil's potential remains trapped beneath the infamous Custo Brasil, and the reelection of the Rousseff administration portends more of the same. While the Peña Nieto government has managed to pass watershed reforms, Mexican voters appear far more concerned with the country's thus-far-lukewarm recovery, raising the specter of reform fatigue there. India's prospects continue to be plagued by transportation bottlenecks, bureaucratic delays and a parliament reluctant to pass certain reforms. In Indonesia, vested interests and a fragmented coalition may force Jokowi to compromise on elements of his agenda, leaving many of those who supported him even more disillusioned with the system.

And speaking of disillusionment, been to Japan lately? A second recession in five years and floundering public support have forced the delay of another tax hike, questioning the viability of that ever-important "third arrow" of structural reforms.

But don't let these crosscurrents fool you. Modi continues to captivate the Indian electorate, despite having ended state-controlled diesel subsidies and raised gas prices. Jokowi's own success raising the price of subsidized fuel could strengthen efforts to deal with Indonesia's infrastructure and social needs.
Recent airport and highway auctions in Brazil, as well as the well-received appointment of Finance Minister Joaquim Levy, are signs that Rousseff may have learned from her first term. Meanwhile, there are strong indications that Mexico's economy is starting to gain momentum, and the implementation of recent reforms will only enhance competitiveness going forward.

A struggling opposition handed Shinzō Abe a renewed mandate to push forward on his reform agenda. As the effects of April's tax hike fade, and required inventory rebuilding boosts production, a return to growth in Japan could help usher in the missing bow to Abenomics' three arrows -- income growth -- thus setting the stage for that ever-elusive "virtuous cycle."

In addition, the recent plunge in oil prices will ease the burden on net oil importers like Japan. Weaker oil prices have also forced many oil producers to recognize their own fiscal consolidation imperative. Regimes in the Middle East, not typically associated with reform, are having to consider the need to cut deficits and realign spending toward productivity enhancing ventures.

The big question remains whether governments will manage to launch and sustain this myriad of reforms, while at the same time promoting the growth needed to cement a recovery mindset. But if, as we believe, a sustainable global recovery is already taking hold, courageous leaders will be further emboldened in their efforts to pass and implement needed reforms.

The bottom line? The tides of reform will forever move in ebbs and flows, influenced by the prevailing socio-economic context. But, while there will always be outliers (and one should pay close attention to ratings differentiation), the current wave of reforms still has momentum. If so, this will have the capacity to deliver enormous wealth to host countries, and reveal substantial opportunities for Canadian companies.]]>And The Biggest Economic Surprise of the Year Goes To...tag:www.huffingtonpost.com,2014:/theblog//3.63420962014-12-17T16:33:40-05:002015-02-16T05:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
For the world's top economy, things began badly. Weather fouled the stats leading up to the New Year, and things got worse in the winter months. It cost the economy over 2 per cent of GDP -- but there was a huge sigh of relief as activity roared back by 4.6 per cent in the second quarter and 3.9 per cent in the third.

There's little sign of a let-up in the final quarter, capping a rebound that many consider a surprise. It isn't, really -- signals pointed clearly to a multi-front US revival, and bad weather merely delayed things by three months. Weather surprises that don't undermine the broader economy have to be expected from time to time -- so this wasn't really the big one.

Maybe Europe gets the nod this year. After the fanfare in mid-2013 that hailed the end of its lengthy recession, the Euro Area came precariously close to a triple-dip this year. It set off alarm bells in financial markets, but perhaps the real surprise is that after all Europe has been through in recent years, survey results show that the continent's consumers and businesses did not lose their cool; confidence numbers were remarkably resilient. At the same time, the zone's greatest fiscal sinner is mending its ways. Greece expects to post not only a balanced budget, but a return to economic growth -- well ahead of the doomsayers' schedule. Others are seeing similar progress; austerity is working. Wish we could say the same of Japan.

But could Europe be scooped by the BRICS? Maybe; one by one, they have posted discouraging results, and for various reasons. For those who hailed them as the new global growth engines, a big disappointment indeed. For those who see them as "follower" economies, not so surprising. With the world still looking for a firmer footing, it's no real shock that the big emerging markets are doing the same. Strike this one, too.

The ebola outbreak was a nasty shock, and in a globalized world, the spread of epidemic is always an alarming threat. Thankfully, the issue has stabilized, and did not confirm the worst fears of world leaders.

Could this year's surprise be more on the political front? Perhaps. With increased democratization, we could expect that the cult of personality would be less of a factor. Yet with the passing of Mandela, South Africa experienced the end of an era -- and at the same time, an economy sliding into disarray.

The reform agenda of Manmohan Singh lost its momentum, but along came the lower-caste son of a tea salesman, capturing the national imagination and upsetting the status quo with promises of renewed reform. Joko Widowo seems to be doing the same with a populist win in Indonesia. And then there's the ever-popular strongman in Russia, who in the wake of his shocking international bravado cleaned up in regional elections this year.

Which brings us to the crux of this issue. Although 2014 birthed many candidates for surprise of the year, the top choice was actually determined early on. In February, the world was wowed by a very showy -- and expensive -- winter Olympics in a little-known part of Russia. Little did we know how quickly we would move from Sochi to siege, from a celebration of peaceful world competition to a conflict that threatens the world's largest economic zone -- at a time when, although in repair, remains vulnerable to the structural fissures brought on by the Great Recession. With the ongoing impasse, there's still a lot at stake.

The bottom line? Given recent history and 2014's dark development, we can hope for no surprise, or a positive one in 2015. Maybe that would be peace on earth, for a change. Merry Christmas, and happy holidays to you and yours.]]>Prices Are an Ocean Apart...For Nowtag:www.huffingtonpost.com,2014:/theblog//3.63032802014-12-10T16:48:41-05:002015-02-09T05:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
First off, the worry is warranted. Recent consumer prices on both sides of the pond are hugging the zero-line. Central banks typically ratchet up the alert level when this happens, as previous bouts of either of the 'dreaded D's' have generally been ugly for the economy. Moreover, central banks don't have a developed playbook on deflation. Just ask Japan. Inflation is another issue; although it's the central banks' prime obsession, they boast a 25-30-year playbook that has worked extremely well over that period. The absence of workable strategies for combating price weakness makes the current context more than a little unsettling.

U.S. consumer prices were well-behaved through June, shaking off the blahs that accompanied the temporary weather-induced slowdown in the first quarter. However, there have now been four back-to-back months at or below zero growth, and the headline year-on-year growth is back below the 2 per cent level. Euro-area growth has been even softer. Weakness can be traced back to March, and even though the record before then was positive, it wasn't great. CPI for the region fell 0.1 per cent in October, heightening concerns. Year-on-year growth has now been below the half-per-cent marker since July.

Core inflation numbers tell a different story. By 'core', economists and statistical agencies are referring to that group of prices that are less volatile and subject to the vagaries of various international events. Traditional core prices strip out the volatile food and energy components, as the core measure is more helpful in setting the course for monetary policy. More sophisticated measures have been developed over time, but for our purposes, the more simple measure suffices. So, do core price movements tell a different story than the headline indexes?

Indeed they do. US core prices are jumping around lately, but on average they have been very close to the key 2-per-cent level over the past eight months. If anything, there are worries that the nascent rise in economic growth will soon put upward pressure on core prices, and that the Fed is actually somewhat behind the monetary policy curve. Remember, policy tightening needs to happen anywhere from 12 to 18 months ahead of price movements to nip them in the bud.

Core prices in the Euro Area are also on a different path than headline numbers, but the story is quite different from America's. Core prices in Europe are increasing at about twice the pace of the all-items headline rate. However, that's still not much to write home about. Core price growth has steadied at about 0.75 per cent year-on-year, less than half the pace in the 'States. Monthly growth is more of a worry. It saw back-to-back declines in September and October, and the only signs that things may pick up are the up-trend in retail sales and stabilized confidence. For the moment, the ECB is likely to remain on high alert, ready to go into action if need be.

The cross-Atlantic differences in price behavior have analysts wondering about divergent monetary policies. No doubt the doves will be active, pressing for a heavy dose of quantitative easing on the continent in an all-out effort to stave off deflation. The ECB has thus far resisted high-profile calls to do 'all that it takes', but is reserving the right to go into action the instant they feel the need. In this hesitation is a positive message: the ECB must see current price weakness as temporary. And it may get help from plunging oil prices: as lower pump prices free up more income for other expenditures, those prices may well take off.

The bottom line? The drama in the world of prices has turned the spotlight back on deflation. The US is nowhere near it, and has the opposite problem. Europe is running close to the line, but most seem to feel that it is temporary, and there are good reasons to believe that the worst will soon be past.]]>10 Great Reasons to Reject Protectionismtag:www.huffingtonpost.com,2014:/theblog//3.62640242014-12-03T17:45:44-05:002015-02-02T05:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
1. International trade was a key driver of global output in the last economic cycle. The world economy grew at an average pace of 4 per cent from 1999 to 2008, but at the same time, exports expanded by 6.5 per cent. As a share of GDP, trade increased from under 40 per cent in 1990 to 65 per cent in 2007. Why threaten the resumption of that impressive trend?

2. The same phenomenon is a key job generator. As trade has become an increasingly larger part of the global economy, the number of trade-related jobs has also grown. By the numbers, jobs directly connected to international trade likely rose much faster than the rest, now accounting for at least one-third of total employment, up from just 20 per cent in the early 1990s. Should we mess with that success, especially as pockets of the developed world are still struggling with massive unemployment?

3. Technology has made trade with every part of our planet feasible, enabling exploration of efficient business solutions worldwide on a scale that has never been possible before in human history. Moreover, recessions tend to urge this process forward. Taking these facts together, it is possible that the neo-protectionism brought on by the Great Recession has never been more of a threat to world prosperity than it is today.

4. Protectionism never happens in isolation. It breeds further (retaliatory) cost-hiking protectionism, as the Recession plainly illustrated, and once entrenched, it is much harder to roll back.

5. Firms shielded by protectionist walls tend to become less productive and efficient over time.

6. The resources required to enforce protectionist measures could be better employed elsewhere.

7. Many multinational firms make the most of their sales outside their home country. These sales are put at risk by retaliatory measures provoked by their home country's protectionist trade actions. More than ever, 'us-first' trade policies actually put at key risk a substantial number of good jobs at home.

8. High-profile protectionist measures were enacted during the crisis to maximize the domestic impact of anti-recessionary stimulus measures. That would have made sense if only a few economies were engaged in stimulus, but most joined the fray, negating the perceived need to disrupt trade flows. Now that stimulus and the austerity that followed are well behind us, this reason for economic wall-building is also in the archives.

9. Protectionism is essentially antagonistic, creating unnecessary bi- and multi-lateral tensions. With the political unrest that fomented in the wake of the crisis, there was arguably a greater need to identify an 'enemy without'. As global growth rises, these sentiments are expected to go into decline, and with them, yet another flawed reason for protectionism.

10. Who bears the cost of a country's own protectionist measures? The very ones it is purporting to protect -- its own consumers. These are the ones that have to pay the higher costs of tariff-protected goods and services, eating up income that might have been invested in the domestic economy, or spent on other home-grown products. Such a recession-prolonging inefficiency tax that makes little sense.

The bottom line? The list goes on. Sadly, protectionism will likely always sell well in an economic trough, but its scant, temporary benefits, weighed against the incalculable gains of globalized trade, hardly register. Our hope? That as the economic recovery continues, these policies will be fast removed and forgotten.

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]]>US Businesses Set to Spend in a Big Waytag:www.huffingtonpost.com,2014:/theblog//3.62278862014-11-26T18:19:07-05:002015-01-26T05:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
As economic indicators go, the crisis was pretty tough for US business investment. After adjusting for inflation, total private investment fell by 20 per cent in just 18 months, and from there it took 48 months just to climb back to pre-crisis levels. While a relief, that's really not a huge achievement. Trend investment growth would have had it well above that level by now; as a share of GDP, investment is still 500 basis points below where it ought to be, so there is still a lot of catch-up to do. Are US businesses up to the task?

Perhaps a little context will help. Prior to the global crisis, US businesses were investing at a breakneck pace. They had to, in order to keep up with frenzied global activity. Consumers everywhere were overspending, housing markets were impossibly hot, and businesses the world over had to keep pace, regardless of the fact that activity was ultimately unsustainable. When the bubble finally burst, it left businesses with a massive surplus of capacity that was obviously going to take a long time to get used up.

As such, investment shut down; why increase capacity when there is already far too much? Since the crisis, US business has been doing just that: growth in the economy has in large part been serviced by existing industrial capacity. Trouble is, this below-trend investment growth has persisted for quite a few years, and has become sort of normal. Does that mean it will never get back to the higher trend growth of yesteryear?

Some believe so, but this opinion flies in the face of current data. Over the past four years, even the tepid economic growth we have seen has steadily used up spare capacity stateside. Now, the total capacity utilization rate is just 1 per cent below the previous peak, and rising. Capacity is almost as tight as it was, without the frenzied pace of pre-crisis activity. Multiple indicators suggest that investment is sub-par and needs to rise. But is all this evidence enough to jolt businesses out of their post-crisis, hesitant, "you-first" investment mentality?

Only if activity proves it to them. The moment US businesses sense that tight capacity is cheating them out of potential profit, they are likely to open up the coffers. At the current pace that purchasing managers see orders flowing in, businesses already appear to be behind the curve. The Duncan leading indicator agrees, as does the MNI-Chicago Business Barometer and the Economic Policy Uncertainty index. A more direct indication of business investment intentions is the Philly Fed's capex orders index -- which thankfully is on a strong up-trend and consistent with levels of rapid investment growth.

There's additional evidence in construction spending. In the energy sector, construction put in place is currently up 29 per cent year-over-year, an impressive increase. For all the naysaying that it takes, US manufacturing is also active. The same indicator for this sector is up 20 per cent over 2013 levels. What is striking about these industries is their rapid response to conditions. Typically, it takes a couple of years for needed construction to get put in place. This time around, capacity is likely turning this kind of investment on much more quickly. If so, suppliers could be facing a great dilemma. If demands are surging, will they actually have the capacity to create the capacity that these industries need? With capacity particularly tight in the machinery industry, it's not entirely clear.

The bottom line? The US industrial machine is facing very tight capacity at the same time as growth is ramping up. This has unshackled investment, and this time, it's no day pass. Firms have already begun to invest, so their suppliers need to wake up. Their competitors also need to take note, as they may soon have an opportunity to "help" fill the capacity gap.]]>If Growth Goes Up, Shouldn't Oil Prices Rise?tag:www.huffingtonpost.com,2014:/theblog//3.61916062014-11-20T11:32:16-05:002015-01-20T05:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
First off, we need to understand the hyperanalysis of 2008. Oil prices began to rise in early 2007 from the low-$50 level to just under $75 by the fall. That's pretty dramatic, although prices had hit $75 in 2006. Yet those gyrations paled in comparison to what was coming. Oil sold for over $90 per barrel by year-end, and continued a steady march through July, 2008, hitting $145. Unclear of the reasons for the runup, markets presumed that it was a reaction to the significant current and near-future needs of emerging markets, together with steady increases in demand from the rest of the world. It sure looked as if prices were unstoppable, surging toward $200 per barrel.

It's easy to forget now, but the drama didn't end there. Prices hit a low of $30 just before Christmas as financial and then economic crisis swept over the globe. Most analysts were red-faced and befuddled, and energy investors were livid. Fortunately for both camps, there was a quasi-recovery. Prices were back to $75 by late 2009. What followed this was, once again, extraordinary. The rebound in 2009-10 made sense in light of the precedent-setting deluge of global fiscal stimulus. But the flat economic performance that soon ensued -- and persisted for four years -- suggested prices much lower than the 2011-13 average of US $96. So, were the "supply-bears" right?

Actually, the data prove them quite wrong. Inventories soared in the wake of crisis, as production increases clashed with significantly lower usage worldwide. Moreover, the price scare encouraged lower energy intensity -- oil usage per unit of GDP continued to fall in developed and emerging markets alike. But the price spike also encouraged higher exploration and development. Oil plays that were previously uneconomic became viable, and spurred on innovation that continues to lower the cost of recovery. Since 2005, U.S. production has soared by 4.5 million barrels per day (mmbd), thanks to the significant contribution from shale deposits. At the same time, Canadian supply is up 1.2 mmbd, and there have been significant increases in Brazil, the Middle East and other key producers. We should hardly be surprised; production increases always follow price spikes. Pre-crisis, peak global production was pegged to occur sometime toward the end of the last decade. That date, always a moving target, has been shifted out to 2025.

Why, then, were prices so resilient? In a word, liquidity. The vast amounts of cash reserves amassed by corporations in addition to unprecedented cash injections by the Fed occurred at a moment when the world didn't really need them. Corporations weren't investing. Consumers weren't borrowing; indeed, they were deleveraging in a big way. But the cash still had to earn a return, and it seems that in the general search for yield, it made its way to the periphery of the market, including commodities. It's possible that prices have been artificially high for a long time.

Now, with the economy recovering and geopolitical tensions compromising key oil flows, we should expect prices to be rising. However, the opposite is happening. Increased supplies are a key factor, but they don't explain everything. Lower prices are also roughly in synch with the Fed's tapering program. If so, then we can expect oil prices to continue weakening as tapering morphs into other forms of monetary tightening.

The bottom line? It's clearly abnormal, but it looks like higher world growth will mean lower oil prices. It's not the best news for oil producers. But here's a neat upside: the growth that leads to lower oil prices will be further fueled by them -- a timely and badly-needed bit of "growth insurance."

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Several measures attempt to provide an answer. Consider the Aon Political Risk Map, a tool for assessing political risks across the planet. Back in 2005, it seemed that political risks were ebbing, making the world a safer place. Three years later, upgrades to risk assessments outpaced downgrades almost threefold. Then in 2009, an about-face: not only did downgrades outpace upgrades, but a new 'very high' risk category was created. By 2012, there were seven times more downgrades than upgrades. Things got better in 2013 -- briefly. But this year is again tilted deeply toward downgrades, with each of the BRICS countries negatively affected.

Further evidence is provided by the Global Business Barometer. In its latest survey, the barometer indicates that 44 per cent of the 1,500 executives surveyed cited political risk as a key risk they face, the highest result in the survey's short history. While the results have fluctuated in the past few years, it is noteworthy that the recent result is higher than the level of concern registered immediately following the onset of the Arab Spring.

The MIGA-EIU Political Risk Survey points to increased concern among international investors. When asked about the constraints to their foreign investments, they ranked political risk second only to macroeconomic instability. This is substantiated by a reference to the UNCTAD World Investment Report, which has been recording disputes between investors and states since the mid-1980s. The number has surged in that time from almost no activity to 50-60 new disputes annually.

Ten years of data in the Fragile State Index indicate a disturbing trend. Since 2005, the number of states in the 'high alert' and 'very high alert' categories more than doubled. This Index measures the degree of control a state has over its territory and the ability of the government to implement policies and provide reasonable public services.

Put these indexes together, and a general picture of increasing political risk emerges. Our hybrid index is up by over 50 per cent since 2005, a dramatic increase that, if sustained, paints a scary picture for future international transactions.

Firms that are active internationally are signaling that these messages are registering with them. The higher perception of this class of risks has led to increased demand for political risk insurance. This suggests that the increased concern is not necessarily inhibiting international activity, but that firms are still active and desiring to mitigate their risks through available financial instruments.

If this is indeed the attitude, it's a relief. International investment flows are a critical piece of the evolving global trade landscape. As the world gets back to the business of growing, international investments are not just expected to resume, but to grow more intense -- for normal reasons like access to resources, lucrative markets, production clusters, and research and development centers -- but also for access to large pools of labour.

Although the rising risk trend is clear, there is still not enough data to conclude that the change is structural, and will be sustained into the future. Sure, the ability to mass-organize is unprecedented, thanks to communication technology. But another well-known driver of dissent is prolonged economic weakness. Time will tell which factors dominate in the future.

The bottom line? Political risk is clearly on the rise, and Canadian firms active in foreign markets need to be aware -- of both the risks, and of the means available to mitigate them. And if we're fortunate, renewed growth may reverse the trend.]]>Dredging Up the Dreaded Economic "D-Word"tag:www.huffingtonpost.com,2014:/theblog//3.61144822014-11-06T14:29:01-05:002015-01-06T05:59:02-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
This verbal battle is a dangerous one. It resurfaced in early 2008, just weeks after the Fed began an aggressive spate of rate-cutting. Convinced that Europe had decoupled from the weakening of U.S. output, ECB President Trichet famously raised interest rates on July 9 -- at precisely the same moment as the EU started to sink into the global economic mire. What then followed was a dramatic about-face -- a sequence of rate cuts that from start to finish was almost twice the speed of U.S. rate movements. In the relatively short (and volatile) history of the ECB, it has consistently moved rates -- both upward and downward -- in sync with the U.S. Fed, but with a multi-month delay. In short, there's no recent evidence that demonstrates decoupling, in spite of the pronouncements.

Is today any different? Markets appear to think so. Consensus expectations hold that the U.S. Fed is likely to begin a rate-tightening cycle sometime in the first half of 2015, a view that has been steady now for a number of months. Recent developments have market-watchers in Europe convinced that the ECB is unlikely to move rates upward until early 2017. If so, it would be the longest lag between U.S. and EU moves since the creation in 1999 of the ECB, and it would sure look like some form of decoupling had indeed occurred. Although the weight of recent history begs to differ, could decoupling really be in the works? Are the rule-books about to be rewritten?

One look at GDP data gets a yes-vote. The U.S. suffered in the first quarter, but when the weather improved, the economy snapped back at an outsized 4.6 per cent annualized pace. In contrast, Italy sunk back into recession, Germany posted a negative quarter in the April-June period, and all France could say was that they were 'stable' -- at zero growth, literally teetering on the edge of recession. While shocking, what is puzzling about this nascent turn is the absence of a clear reason for it. And while sentiment can turn on a dime, surveys show that European consumers and businesses are still relatively upbeat. In addition, it's not as if Europe has a long way to drop; the elevator never got far from the ground floor; growth is in fact more likely than another economic dip.

Pundits seem to agree. As of September, the average forecast still held that growth through the remainder of this year will revive, enough to notch a 1.2 per cent gain next year. It doesn't sound like much compared with U.S. growth -- until it's compared with estimates of long-run potential growth. The OECD figures that the current rate for Europe is about 1.1 per cent; the U.S. rate is just over twice that. If so, spare capacity is getting used up in both zones, although admittedly it's tighter in the U.S. Thus far, forecasters have both economies growing in tandem. If so, then monetary policy should take a roughly similar path. The recent extraordinary measures announced by the ECB are sort of quasi-contingent tools -- almost as if the bank feels that ultimately they may not need to put them to full use.

Time will tell whether the two monetary powerhouses will head in opposite directions. Given the recent history of co-movement, it's hard to believe that this is the precedent-setting moment. And a limited list of reasons for divergence makes it even harder.

The bottom line? For all the damage it has done to the reputations of brilliant analysts and policymakers over the years, 'decoupling' is still in the economic vernacular. It's not likely to ever die a decent death, but unless the radical economic intertwining we have witnessed over the past quarter century can be undone, it is becoming less likely over time that this word will be anything other than a fleeting headline-grabber. Given the world's need for sustained growth, we can only hope so.]]>Why Things Are Looking Good For Canadian Export Growthtag:www.huffingtonpost.com,2014:/theblog//3.60948802014-11-03T17:30:21-05:002015-01-03T05:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
Naysayers have lots of fodder. Italy is back in recession, and German growth has faltered. France has 'stabilized' at zero growth, and is struggling with political impasse. The setback is serious, but the cause remains a bit of a mystery. The Russia-Ukraine conflict is a plausible cause, although it hasn't moved business and consumer confidence far off the recent high perch. Pre-existing fiscal and financial weaknesses are more an effect than a cause of Europe's re-weakening. Key policymakers and a bevy of respected forecasters see Europe's current situation as temporary, and expect growth to rise again in short order.

What of renewed slowing in emerging markets? The big ones are a mixed bag. Brazil is suffering under slower investment, pervasive infrastructure bottlenecks and policy uncertainty, with its negative influence spreading to the rest of the continent. Russia's economy has stagnated in the wake of tightening Western sanctions. On the other hand, India's prospects have brightened somewhat with the election of the Modi government; there's good reason to believe that the reform agenda will be revitalized, rekindling business investment and key infrastructure projects. China is bumping along, awaiting a revival in global trade. If that happens, and it already seems to be underway, then 8 per cent growth, our forecast for 2015, is quite possible.

So far, these factors aren't driving growth; they're being driven by it. Is there a driver? There is, and it just happens to be our number one customer. U.S. leading economic indicators are rising, and now the lagging indicators are joining the fray. Second, the U.S. is showing plain evidence of pent-up demand in housing, consumption and business investment. Few factors give greater credence to the sustainability of growth than pent-up demand. But there's more: If pent-up demand means that consumers and businesses have to get out there and spend, a third critical development means that they actually want to. For the first time in five years, confidence has returned to levels consistent with sustained economic growth. This movement is especially significant given long-entrenched global pessimism.

The list of reasons goes on. A fourth is lower growth-drag from government austerity. A fifth factor is the move toward monetary tightening. Tapering is fast turning into the need for higher interest rates, a direct result of higher growth. A sixth factor is a weaker one, but it is notable that most analysts concede that higher U.S. growth is now here to stay. EDC's Fall 2014 Global Export Forecast calls for the U.S. economy to accelerate from 2.2 per cent growth this year to 3.6 per cent in 2015. This is enough to drive world growth from 3.2 per cent this year to 4 per cent in 2015, launching the next planet-wide growth cycle.

This is great news for Canadian exporters, but it doesn't guarantee growth. However, the news gets better. Tightening U.S. monetary policy suggests that the Canadian dollar will remain weak. And in spite of competitiveness concerns, exports are rising enough this year to suggest 10 per cent growth, and an added 6 per cent in 2015. This in turn will spur business investment, lifting Canadian GDP growth to 2.8 per cent in 2015.

The bottom line? U.S. consumers and businesses are back, and this is already translating into solid Canadian export growth. It has been a long time coming, but there is more. Knock-on effects of U.S. growth will soon translate into higher activity in other OECD economies and in emerging markets. The driver is the U.S., but the rest of the world is largely in gear. It will be critical for Canadian exporters to make sure they're in gear too.

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]]>Playing Ball With Chinatag:www.huffingtonpost.com,2014:/theblog//3.60435802014-10-24T18:09:43-04:002014-12-24T05:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
First off, we do not have a hub, but let's assume for a moment that one will be established that includes all the usual bells and whistles. This would typically include the designation of a local clearing bank by Chinese authorities that can settle transactions locally in RMB, a bilateral swap agreement between the central banks, and direct trading between the RMB and the Canadian dollar (rather than having to loop RMB trades through USD).

It is noteworthy that those quick to establish hubs each have unique advantages. Hong Kong is the historical epicentre of RMB activity and is intimately tied into the mainland economy. London is the global capital of foreign exchange trading. Taipei has more than 80,000 foreign affiliates on the mainland, not to mention about three million RMB-carrying tourists per year. Singapore is the window through which Southeast Asia engages China, and is a centre for corporate treasuries in Asia.

Canada does not enjoy any of these benefits, but the logic for an RMB hub is nonetheless strong, particularly concerning trade payments. First and foremost, China is now one of our most important trading partners. In fact, with just under $73 billion in two-way merchandise trade in 2013, or eight per cent of Canada's total trade, China stands alone at number two on the list. This means that all of the standard incentives for RMB- denominated trade apply in spades for Canada. The most important of these are the cost savings on foreign exchange transactions, the wider universe of Chinese clients that may be accessed, and the price discounts that can be negotiated into import and exports contracts.

Moreover, a hub would allow Canada's financial sector to develop a deeper pool of RMB liquidity. This has been the experience across Asia and Europe after hubs were established and it is a first step toward the creation of critical infrastructure, such as a flexible RMB derivatives market.

A second key factor is the awareness effect generated by the buzz that always surrounds the establishment RMB hubs. While many of Canada's big players are already aware of the potential benefits of direct RMB trading, and are preparing themselves for it, this is not always the case with small and medium-sized enterprises (SMEs), which do not have as many resources to devote to the latest foreign exchange strategies. The risk here is that Canada's SMEs could be caught off guard by a rising renminbi and wind up losing some of their competitive edge as competitors in Australia, Germany, the United Kingdom, France, South Korea and elsewhere try to increase their market share by offering RMB denominated contracts.

So far this has not happened because the most likely source of demand for RMB denominated trade--the Chinese trader -- still prefers to settle contracts in USD. The main reasons for this are the predominance of USD in global value chains, the low cost of the dollar, expectations that the RMB will get back onto the appreciation curve, and the limited nature of the RMB derivatives market. Simply put, denominating contracts in greenbacks allows Chinese companies to simplify their supply chain business, reduce foreign exchange risk, and raise financing on the cheap.

Of course, this scenario will not last forever, especially when it comes to cheap dollars. Structural weaknesses elsewhere, higher US interest rates and a general global preference for greenbacks all suggest a more expensive medium-term USD.

The bottom line? At least three realities regarding the RMB's internationalization process are clear: first, it is ongoing and irreversible; second, it will have important implications for the global economy; and third, Canada's competitors are already adapting and learning how to embrace it. Translation, Shoeless Joe is getting ready to play ball. Will we be ready for him?

MORE ON HUFFPOST:]]>Has Canada Lost That Latin Feeling?tag:www.huffingtonpost.com,2014:/theblog//3.59994842014-10-17T12:24:32-04:002014-12-17T05:59:01-05:00Peter Hallhttp://www.huffingtonpost.com/peter-hall/
A region-wide barometer of conditions tells the tale. The Economic Climate Index provided by the Vargas Foundation has sunk to a multi-year low of 85, where 100 is the "neutral" point. Scan broad data, and they generally agree. Year-to-year GDP growth for the seven largest Latin American economies has fallen steadily in the past four quarters from over three per cent in the spring of 2013 to just above zero in the second quarter of this year. By all measures, that's a precipitous decline, and it has led pundits to downgrade forecasts for most countries. Of all the possible issues, what is reining in Latin American growth?

The answer isn't easy; it varies economy by economy. Actually, the geographic zone has its hot spots, its not spots, and economies in the middle with specific stories of their own. Let's start with the more challenging stories. Venezuela's woes are well-known. The collision of oil-funded subsidies, sliding oil production and price-weakening are wreaking havoc with the economy. Argentina remains a nation of great but unrealized potential, as it struggles under a debilitating policy legacy and recent moves that suggest no material change in policy direction in the short term. But these cases were well known.

Regional growth has been strongly influenced by the deteriorating performance of its behemoth, Brazil. In the wake of event-led construction and past infrastructure projects, Brazil's growth has slowed alarmingly. Policy uncertainty has muddied the waters for investors at a time when they are badly needed. The Global Competitiveness Index currently ranks Brazil 120th of 144 countries for the quality of its infrastructure, and the ranking is falling. Roads, ports and air score particularly badly, harming Brazil's reputation as a place to do international business.

Even so, there are good-news stories. Mexico has succeeded in attracting large inflows of foreign investment despite global weakness, and the breadth and surprising success of its reform agenda is likely to stoke those flows further. Moreover, higher US growth certainly hasn't hurt, paving a path for a steady acceleration in activity. Colombia is also benefiting from greater openness and extensive infrastructure spending. In fact, it is more concerned about managing growth in a sustainable way.

Then there are the economies in the middle. Weaker commodity prices have caused investors to shy away from resource projects in Chile, Peru and other countries across the region, raising concern about near-term growth and longer-term projections. Resource projects are likely following a well-scripted strategy: when prices fall, it is best to pull the plug on projects in hopes that all parties to the deal will come back to the table and offer easier terms that make the project more viable. In the mean time, countries face more moderate growth, the uncertainty around the timing of medium-term activity, balance of payments and currency implications, and the impact on public finance.

This scene generally puts the region's countries into two camps. First, there are those that are structurally prepared or preparing to accommodate higher activity. And second, those that are grappling with significant structural impediments and policy sclerosis. Higher global growth will definitely benefit the former. The latter are more likely to get left behind.

The bottom line? Latin American economies looking for more growth are not likely to find it within the region; there are simply too many significant structural impediments. Those closer to and better prepared for current global growth engines are already doing better. More peripheral economies will catch on. And those with critical roadblocks will take time to harness their share of activity in the nascent growth cycle.]]>